Washington Report

Advocacy Updates from Washington D.C.

Tax Provisions in Schumer-Manchin Inflation Reduction Act

In a move this week that surprised not only most Members of Congress, but also the White House and policy observers everywhere, Senator Joe Manchin (D-WV) reversed course and gave the green light on climate, prescription drug, and anti-inflation legislation that he had previously blocked and declared dead. The announcement, put forth by both Manchin and Senate Majority Leader Chuck Schumer (D-NY) opens the door to a legislative push by Democrats to try to pass the legislation through the Senate the first week of August and possibly through the House and to the President’s desk before the end of the month.

Unlike earlier iterations of proposals designed to accomplish the same goals, and even more ambitious ones, this latest tentative agreement would ditch all but three tax increase provisions meant to impact higher-income Americans by closing so-called “tax loopholes.”

Tax Provisions

15% Alternative Minimum Tax for Large Corporations 

This provision, which has been debated for years, would require the largest U.S. corporations (the 200 or so companies with profits exceeding $1 billion) to pay an alternative minimum tax of at least 15% of their “book” income, which is the profit they report on their financial statements for shareholders and others, with some adjustments. The Joint Committee on Taxation estimates that this new tax would raise $313 billion over the next decade.

Extra Funding for the Internal Revenue Service to Improve Taxpayer Compliance 

This provision would increase funding to the IRS by about $80 billion over the next decade to jump-start tax law enforcement through increased audits on corporations and higher-income individual filers. Some of the funding would be used to beef up taxpayer services and to modernize the IRS’s computer systems. The Congressional Budget Office estimates that this extra funding would net the Treasury about $124 billion over ten years.  Taxpayers earning less than $400,000 per year would be specifically excluded from the increased enforcement activities, per a top-level description of the agreement issued by Senators Schumer and Manchin.

Change the Rules Governing Partnership With Carried Interests

This provision would extend the long-term capital gains holding requirement for a carried interest in a partnership from the current-law 3 years to 5 years, meaning that the gains from investments held less than 5 years would be taxed at ordinary income rates as high as 37% and not at capital gains rates.  The provision would also make several other changes to how these interests are taxed. While the provision grants exceptions to the longer holding period for assets used in a real property trade or business and for individual taxpayers with incomes of less than $400,000 per year, some of the other changes could reportedly have the effect of extending the 3-year clock to a much longer period and otherwise require some partners facing the ordinary income rates on their carried interests.  (A real property trade or business is defined as any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage business.)  Estimated to raise about $14 billion over a decade, this revenue raiser is tiny compared with the other two, as well as many other tax offsets that were under consideration last year.

Climate Change/Energy Savings Provisions

The Inflation Reduction Act also includes significant provisions for both residential and commercial property owners that would help reduce their electricity bills, make their properties more energy efficient and help them afford technologies that would lower carbon emissions. The highlight of these efforts are ten years of tax credits that would make homes more energy efficient and run on clean energy, and make heat pumps, rooftop solar, electric HVAC and water heaters more affordable.


The news of the sudden deal between the two Democratic senators has surprised many and delighted most Democrats, who believe they badly need a legislative success in the closing months before the congressional midterm election. However, this is certainly not a done deal as all other Senate Democrats will have to also sign off on the provisions of the Schumer-Manchin agreement, because all Republicans are opposed.  Many eyes are on Senator Kirsten Sinema (D-AZ) who opposed many tax increase proposals her colleagues put forward to pay for the previous Build Back Better bill and its successor proposals.  She specifically came out against the carried interest change and may well do so again. Moreover, a very thin margin of Democrats over Republicans in the House could kill the prospects of the deal going through that body, especially if some of the so-called “SALT cap” Democrats follow through on earlier pledges to not support reconciliation bills that don’t provide for relief from the $10,000 limit on state and local tax deductions that was enacted by the Tax Cuts and Jobs Act of 2017.

The energy savings provisions would also help increase resiliency to extreme weather events in coastal communities and would make rural communities more resilient by incentivizing farmers and forestland owners to grow climate solutions and ensure rural communities are able to better adapt to a rapidly changing climate.

What is NAR Doing?

NAR is watching this situation very closely. We are pleased and relieved that the tax offsets proposed in the Schumer-Manchin deal did not include any of about a dozen other tax increases that would have hit real estate investment much harder than the change to the taxation of carried interest might. For example, there is no limitation or repeal of section 1031 like-kind exchanges, no increase in the capital gains tax rate, no changes to the current rules on the step-up in basis of capital assets at death, and no expansion of the 3.8% net investment income tax. Moreover, it appears that the authors of the deal intended to exempt most real estate deals from the carried interest change. We are working with other real estate trade groups to quietly point out to Democratic leaders how the draft language can be improved to do this better. Further, we are encouraging constituents of Senator Sinema to let her know of their concerns with the carried interest proposal and urge her opposition to it.